Theme 2 econ

all of Macro theme 2

Gross domestic product GDP

the total monetary value of all goods and services produced in a country within a given time period

Economic growth

an increase in the real output of an economy measured by a rise in real GDP

Actual growth

Short-run increase in real GDP by using previously unemployed resources - moving inside the PPF toward the frontier

Potential Growth

Long-run increase in the productive capacity of an economy (an outward shift in the PPF)

Business cycle

the cyclical pattern of economic activity characterised by boom, slowdown, recession, and recovery

Recession

Two consecutive quarters of negative economic growth (falling real GDP)

Output gap

the difference between actual GDP and potential GP; can be positive or negative

Aggregate demand (AD)

the total demand for goods and services in an economy at a given price level: AD = C+ I + G + (X-M)

Consumption (C)

Household spending on goods and services - the largest component of AD in the UK

Investment (I)

Spending by firms on capital goods such as machinery, buildings and technology

Government spending (G)

Public sector expenditure on goods, services, and transfer payments

Net exports (X-M)

exports minus imports the trade balance component of aggregate demand

Aggregate supply (AS)

public sector expenditure on goods, services, and transfer payments

Short-run aggregate supply (SRAS)

The total output supplied at each price level when wages and other input costs are fixed

Long-run aggregate supply (LRAS)

The total output an economy can produce when all factors of production are fully and efficiently employed - vertical at potential GDP

Multiplier effect

An initial change in spending leads to a larger final change in GDP due to successive rounds of spending and income

Accelerator effect

A change in the rate of economic growth leads to a proportionally larger change in investment

Inflation

A sustained rise in the general price level of goods and services over time

Consumer Price Index (CPI)

a measure of inflation based on changes in the price of a representative basket of goods and services

Demand-pull inflation

inflation caused by excess aggregate demand, pulling prices upward

cost-push inflation

inflation caused by rising production costs (raw materials) shifting SRAS left, pushing prices up

Deflation

a sustained fall in the general price level; can be harmful if it leads to reduced spending and investment

unemployment

When people of working age who are actively seeking work are unable to find employment

Cyclical unemployment

Unemployment caused by a fall in aggregate demand during a recession (also called demand-deficient unemployment)

Structural unemployment

When there are not jobs available but there are workers with the skills required for those jobs (due to industrial change)

Frictional unemployment

short-term unemployment arising as workers move between jobs

Balance of payments

a record of the financial transaction between a country and the rest of the world over a period of time

exchange rate

the price of one currency expressed in terms of another currency

Appreciation

an increase in the value of a currency relative to another under a floating exchange rate system

Depreciation

a decrease in the value of a currency relative to another

Fiscal policy

Government use of taxation and public spending to manage AD and the economy

Expansionary fiscal policy

Increasing government spending to boost AD (usually during a recession)

Contractionary fiscal policy

Reducing gov spending to reduce AD (used to combat inflation)

Budget deficit

when gov spending exceeds tax revenues in a given fiscal year

Monetary policy

use of interest rates and money supply by a central bank to influence economic activity and control inflation

Bank of England base rate

the interest rate set by the Bank of England’s Monetary Policy Committee, influencing borrowing and saving rates across the economy

Quantitative easing (QE)

monetary policy tool where the central bank creates money electronically to purchase financial assets, increasing money supply and lowering long-term interest rates.

Supply-side policies

Gov policies aimed at increasing the productive capacity of the economy, including wages an employment levels

Labour market flexibility

The ease with which the labour market can adjust to changes in the economy, including wages and employment levels

Poverty

A state where individuals lack sufficient income or resources to meet basic needs; can be absolute or relative.

Relative poverty

Having an income below a threshold relative to the median - typically below 60% of median household income in the UK.

Inequality

The unequal distribution of income or wealth among individuals or groups in society.